Second report in wake of FEGS collapse urges nonprofit boards to 'do better'

Board members of the city’s nonprofits must take more responsibility and become better stewards of their organizations, says a new report released Tuesday, the second self-examination of the sector to come out in the past month.

“Trustees must strive to maximize the good that their organization does while managing its risks,” said the report, written by SeaChange Capital Partners, a merchant bank serving the nonprofit sector, and Oliver Wyman, a consulting firm. “Balancing these can be challenging because of the passion they feel for the organization and its mission.”

Both are responses to the bankruptcy of Federation for Employment & Guidance Service, which shocked the industry and prompted a wave of introspection.

The FEGS autopsy revealed a host of problems and raised the question of why its board hadn't seen the many red flags that seemed apparent only in retrospect, after New York's largest human services provider was brought to its knees.

This new report finds FEGS' circumstancs may not be unusual, and that its collapse may prove a harbinger if the boards that run nonprofits in New York City don't begin practicing better risk management.

“Many trustees do not understand the financial condition of their organization or how it compares to its peers,” the report said. “Distressed nonprofits have very limited ways to recover, so trustees must do all they can to reduce the risk that their organization becomes distressed in the first place. And they must take prompt, decisive action if it does."

As many as 40 percent of the city's nonprofits have no cash reserves, meaning there is little, if any, room for error, the report found. And 18 percent of the social services nonprofits in the city were found to be insolvent.

The sector as a whole is running a 1.8 percent operating deficit on $14.5 billion in revenue, though the margins look a lot better after accounting for investment income.

That only serves to highlight how fragile smaller nonprofits without large endowments might be.

Like the HSC findings, this report laments the lack of government funding for programs, and that the little funding that is appropriated is often late, creating cash flow problems.

But it's the boards that need to be more involved, the report said.

The report offers several suggestions, such as writing a risk tolerance statement, similar in function to a mission statement. It also says that larger organizations may do well to consider a living will that would expedite program transfer and restructuring, should financial disaster hit.

Board members should also read their peers’ 990 IRS forms to see how the industry as a whole is doing and how they compare. And umbrella groups should collect more detailed and timely information from the peer group.

“We expect the report will encourage thoughtful organizational leadership in nonprofits to identify and address significant business risks in a challenging time,” James Sheehan, chief of the state attorney general's Charities Bureau, said in a statement.